What are financial ratios, and how are they used in business analysis?

Financial ratios are numerical values derived from a company's financial statements that help evaluate its performance and financial health. These ratios are used in business analysis to assess profitability, liquidity, efficiency, and solvency. Common financial ratios include the current ratio (measuring liquidity), the return on equity (assessing profitability), and the debt-to-equity ratio (indicating financial leverage). By comparing these ratios over time or against industry benchmarks, analysts can identify trends, strengths, weaknesses, and potential risks. Financial ratios are essential tools for investors, creditors, and management to make informed decisions about a company's financial position and strategy.